IRS mandates 'DeFi brokers' to report user trading data for taxation compliance
IRS mandates 'DeFi brokers' to report user trading data for taxation compliance
The U.S. Internal Revenue Service (IRS) has finalized a controversial regulation requiring brokers in decentralized finance (DeFi) to report gross proceeds from digital asset sales.
Under these rules, DeFi brokers must now collect user trading information and issue Form 1099s, aligning their tax obligations with those of traditional securities brokers.
The regulation, detailed by the U.S. Treasury on Friday, mandates that front-end DeFi service providers directly interacting with users collect and disclose trading data. These entities will be required to file tax returns revealing details such as the names and addresses of users. According to the Treasury, this measure will help taxpayers accurately file their taxes while addressing a tax gap in the digital asset space.
"Aligning tax reporting requirements for digital assets with those for other assets will simplify filing for compliant taxpayers," stated Aviva Aron-Dine, acting assistant secretary for tax policy.
The rule specifically targets platforms like Uniswap Labs, which operates the primary interface for the Uniswap decentralized exchange. However, the application of the rule to decentralized protocols without centralized intermediaries remains unclear.
Industry pushback
The finalized rule has faced criticism from the crypto industry, with experts arguing that DeFi’s decentralized nature makes traditional reporting frameworks difficult to implement. They note that in some cases, there are no centralized entities responsible for collecting user information.
Additionally, privacy concerns have been raised about the extensive data collection requirements. Industry participants assert that DeFi should not be treated like traditional securities due to the unique challenges in creating information collection systems. However, the Treasury and IRS dismissed these concerns, asserting that all financial services operators must adhere to uniform tax reporting standards.
The rule is set to go into effect on January 1, 2027, providing time for compliance adjustments. The IRS first proposed tax reporting rules for cryptocurrency brokers in 2023, but earlier versions were revised following industry feedback.
This regulatory development stems from the Infrastructure Investment and Jobs Act of 2021, which aimed to increase tax enforcement on digital asset service providers to fund federal spending initiatives.
As the IRS enforces these rules, the DeFi sector may face significant operational and structural challenges. While the regulation seeks to improve tax compliance, it also raises questions about privacy, feasibility, and the future of decentralized financial systems.
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